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The United States Conference of Catholic Bishops
Group Ruling on Exemption from Federal Income Tax
and The Official Catholic Directory


The United States Conference of Catholic Bishops (USCCB) Group Ruling ("Group Ruling") is a determination by the Internal Revenue Service (IRS) that organizations appearing in The Official Catholic Directory (OCD; i.e., the Kenedy Directory) are exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC, or "Code"). Ever since the initial ruling in 1946, the IRS updates the Group Ruling annually in June based on the OCD for that year. A copy of this ruling along with a memo from the USCCB General Counsel is sent to the diocesan bishops, diocesan attorneys and fiscal managers, and state conference directors.

Responsibility for reviewing applications for inclusion in the Group Ruling rests primarily with diocesan officials. Because of the important tax consequences of the Group Ruling, it is essential to maintain the integrity of the review process.

The following areas are discussed below:

I. Procedures for Inclusion in the USCCB Group Ruling and OCD

1. Who Must Apply?
Any newly created, newly acquired, or newly affiliated Catholic non-profit organization that wishes to qualify for exemption from federal income tax under section 501(c)(3) of the Internal Revenue Code through inclusion in the USCCB Group Ruling must file an application for inclusion in The Official Catholic Directory. In addition, any Catholic organization that is currently included in the Group Ruling but that reincorporates or otherwise changes its corporate form (e.g., from association to trust or corporation) is considered a new legal entity for IRS purposes and must file a new application.

2. Who Is Ineligible?
Several types of organizations may not apply for inclusion in the Group Ruling:

3. How Does an Organization Apply?
An organization should complete and submit the application found at the end of this document (Attachment A) to the Chancery Office of the diocese in which its principal office is located.2 The organization must also submit any additional required documentation: e.g., articles of incorporation, articles of association, trust instrument, constitution, bylaws, financial statements, and employer identification number (EIN).3

4. When Should an Organization Apply?
In order to ensure that exemption under the Group Ruling will be retroactive to the date of creation or incorporation, an organization should seek written approval of its inclusion within fifteen months of the end of the month in which it was created or incorporated. Accordingly, an organization should apply as soon as possible after creation or incorporation, provided it can furnish sufficiently detailed information about its operations and finances to permit a decision about eligibility. Organizations should also be mindful of the annual OCD publication deadlines. Generally, an organization must obtain written diocesan approval by November of a given calendar year in order to meet the deadline for inclusion in the following year's edition of the OCD.

5. Is It Necessary to File a New Application When New Activities or Ministries Are Undertaken or When Properties Are Acquired by an Organization Listed in the OCD?
Exemption from taxation under section 501(c)(3) applies to the totality of an organization's activities, ministries, funds, and properties (with the exception of activities that constitute unrelated business activities). Accordingly, an organization should not file a new application whenever it undertakes a new activity or ministry, acquires property, or establishes a new fund. Only when an activity, property, or fund is separately incorporated or otherwise constitutes a separate legal entity must a separate listing be obtained. There are, however, exceptions to this rule. For example, a diocese that constitutes a corporation sole will nonetheless list separately its numerous activities, departments, and properties, even though these are not separate legal entities, in order to conform its listings with that of other dioceses.

An organization must report to the diocese any changes in name, address, or corporate form, as well as any material changes in governance, control, purposes, activities, or sources of support to the diocese in which it is listed. Certain changes may adversely affect eligibility for continued inclusion in the Group Ruling.

6. What Are the Criteria for OCD Listings of "Convents and Residences for Sisters" and of "Monasteries and Residences of Priests and Brothers"?
As a result of a recent proliferation of listings in the categories "Convents and Residences for Sisters" and, to a lesser extent, "Monasteries and Residences of Priests and Brothers," it is advisable to emphasize the criteria for such inclusion. In order to be included under either of these two OCD categories, a facility must be owned and operated either by the diocese or a religious institute and must serve as a communal residence for sisters, priests or brothers. Rental unit addresses—whether apartment units, condo units, townhouses, trailers, etc.—where sisters, priests, or brothers reside do not qualify for inclusion under the OCD. Please note, however, that even if a particular location where a sister, priest, or brother resides does not qualify for inclusion in the OCD, it may nonetheless be included in the local diocesan directory, if it meets the criteria for such listing as established by the diocese. The OCD and the local diocesan directories serve different functions and thus are likely to have different standards for inclusion.

7. How Does a Diocese Notify an Applicant of the Outcome of Its Review?
After careful review of an organization's application and supporting documentation, the diocesan official, with appropriate consultation with the diocesan attorney, will determine whether the organization qualifies for inclusion in the Group Ruling. Diocesan officials are responsible for excluding ineligible applicants and should not be pressured into approving questionable applicants. If an unfavorable determination is made, the diocesan official should promptly notify the organization and briefly explain the basis for its decision. If a favorable determination is made, the diocesan official should promptly notify the organization, using the letter at the end of this section (Attachment B). This letter is important to establish that the organization obtained approval within the fifteen-month statutory period.

8. What Are the Consequences of Being Included in the Group Ruling?
An organization that receives written notification from the diocese of its inclusion in the Group Ruling is recognized as exempt from federal income tax under section 501(c)(3) of the Code. Contributions are deductible for federal income, gift, and estate tax purposes. The organization is also exempt from federal unemployment tax. However, the states may impose unemployment tax on certain non-profit organizations even though they are exempt from federal tax. Inclusion in the Group Ruling does not automatically establish exemption from federal excise taxes or from any state or local taxes. Organizations should consult their tax advisors concerning liability for these other taxes. In addition, organizations covered by the Group Ruling, including churches, must pay and withhold Social Security (FICA) taxes for lay employees paid $100 or more during the calendar year. More detailed information is available in the OGC explanatory memorandum that accompanies the annual Group Ruling reaffirmation letter distributed to dioceses.

9. Does Inclusion in the Group Ruling Affect the Form 990 (Annual Information Return) Filing Requirement?
Inclusion in the Group Ruling does not automatically relieve an organization of the requirement to file Form 990. The general rule is that all exempt organizations must file Form 990 unless they qualify for an exemption. Dioceses, parishes, and church- or religious institute-sponsored elementary and secondary schools are exempt from the Form 990 filing requirement. Other organizations should consult their tax advisors to determine whether they qualify for one of the mandatory or discretionary exceptions to the Form 990 filing requirement. More information on exemption from the Form 990 filing requirement is available in the OGC explanatory memorandum that accompanies the annual Group Ruling reaffirmation letter distributed to dioceses.

10. What Are the Consequences of an Unfavorable Decision by the Diocese?
If an organization denied inclusion in the Group Ruling takes no further action, it will not be recognized as exempt from federal income tax. As a result, it will be subject to federal income tax, and contributions to it will not be deductible. However, applicants that are denied inclusion in the Group Ruling are free to file Form 1023, Application for Recognition of Exemption under Section 50l(c)(3), directly with the IRS, if they wish to establish tax exemption under section 501(c)(3) independent of the Group Ruling.

11. What Is the Role of the OCD Editor?
The OCD is published by a for-profit corporation not connected with the USCCB, any diocese, or other church entity. The editor of the OCD works closely with diocesan and USCCB officials to compile the information included in the OCD. However, the OCD editor does not review applications for inclusion in the OCD or approve new listings in the OCD. Applications must be processed through the dioceses or USCCB, where applicable. Applications or other requests for listing that are submitted directly to the OCD editor will be returned.

12. How Is the IRS Notified When an Organization Is Included in the Group Ruling?
Every year, each diocese is required to identify any organizations approved for inclusion in the Group Ruling on special tax forms provided by the OCD editor. These forms were developed in consultation with the IRS National Office. When all the dioceses have submitted their tax forms, the OCD editor sends them to the USCCB Office of General Counsel, which is required to submit them to the IRS by May 31 as part of its request for annual reaffirmation of the Group Ruling. The Office of General Counsel also provides the IRS with copies of the current edition of the OCD.

13. May an Organization with an Independent IRS Exemption Letter Ever Be Included in the OCD?
Certain Catholic organizations that have obtained independent recognition of section 501(c)(3) exemption directly from IRS (by submitting Form 1023) may nonetheless wish to be identified as "Catholic" through listing in the OCD. However, because such an organization has obtained an independent IRS exemption determination letter, it is ineligible for inclusion in the Group Ruling. However, with appropriate diocesan authorization, such an organization may be included in the OCD with an asterisk (*) placed next to its name to signify that it has its own IRS exemption determination letter and is not included in the Group Ruling.

A Catholic organization with an independent IRS exemption determination letter must submit a written request for asterisked inclusion in the OCD to the appropriate diocesan official and must provide the following information: (1) answers to the first ten questions on the Group Ruling application; (2) a narrative description of its activities; (3) an explanation of its relationship to the Church; (4) a copy of its organizing document and bylaws; (5) a copy of the IRS letter that establishes that it is exempt under section 501(c)(3), is not a private foundation under section 509(a), and is eligible for deductible contributions under section 170; and (6) a statement that its activities, purposes, or sources of support have not changed materially since the date of its IRS determination letter. The diocese is free to request any additional documentation it deems appropriate. After review, the diocese will decide whether it wishes to include the organization in the OCD. If approved by the diocese, a copy of the organization's IRS exemption determination letter will be forwarded to the OCD editor, and then to the USCCB Office of General Counsel for final review.

Please be aware that the standards for an asterisked OCD listing are the same as for a regular listing in the OCD. Since the IRS will have already determined that the applicant organization is exempt under section 501(c)(3) and qualifies as a public charity under section 509(a) of the Code and for deductible contributions, the primary focus of the reviewing official will be its relationship to the Church. An organization whose connection to the Church is insufficient to warrant inclusion in the Group Ruling should not be approved for an asterisked OCD listing.

14. What Is the Significance of the Nondiocesan Listings in the OCD?
In addition to diocesan listings, the OCD includes special information sections: e.g., "Hierarchy of the Church," "Roman Curia," "USCCB," "National Organizations," "Foreign Missions," "Missionary Activities," "Religious Institutes of Men," "Religious Institutes of Women," "United States Conference of Secular Institutes," and the profiles of Canada and Mexico. Organizations included in the sections for the USCCB and national organizations are included in the Group Ruling. However, certain sections—i.e., on the Roman Curia, Canada, and Mexico—list organizations that are not included in the Group Ruling because they are organized in a foreign country. Other sections—e.g., "Foreign Missions," "Missionary Activities," "Secular Institutes," and "Religious Institutes of Men and Women"—are summary sections and are not intended to substitute for diocesan listing. To the extent that any organization listed in these summary sections is a foreign organization, it is not covered under the Group Ruling. As a prerequisite for any new listing in the summary sections, an organization first must be approved for inclusion in the appropriate diocesan listing. The OCD editor will not approve requests to add organizations to any summary section unless the organization first obtains the appropriate diocesan approval.

15. What Are the Criteria for Inclusion in the "National Organizations" Section?
An organization seeking inclusion in the Group Ruling as a "national organization" must establish that (1) it conducts significant activities in more than one diocese; (2) it is unable to secure inclusion in the Group Ruling through the usual diocesan procedure; and (3) the diocese in which its principal office is located consents to its listing in the "National Organizations" section. Organizations that conduct annual meetings in various locations in the United States or have members located in various dioceses are not considered to have significant activities in more than one diocese. In addition, use of the word "national" in an organization's name is not indicative of qualification as a national organization. Organizations that are already listed elsewhere in the OCD are not eligible for inclusion in the "National Organizations" section.

Organizations that believe they meet the criteria for national organization listing must submit the basic application plus a supplemental "national organization" application directly to the USCCB Office of General Counsel, 3211 4th Street, NE, Washington, DC 20017. The supplemental application is available from the Office of General Counsel. No organization will be approved for inclusion in the "National Organizations" section unless it clearly meets the additional criteria outlined above.

II. Legal Requirements for Inclusion in USCCB Group Ruling

Upon receiving an application for inclusion in the USCCB Group Ruling, the reviewing diocesan official first should eliminate ineligible organizations (see question 2, "Who Is Ineligible?" in the first part of this section). Applications from organizations falling within any of the ineligible categories should be rejected and returned, with a brief explanation, to the submitting organization. There is one exception: although Catholic organizations with independent IRS exemption determination letters are not eligible for inclusion in the USCCB Group Ruling, they may, upon properly documented request, be considered for inclusion in the OCD with an asterisk (*) indicating the limited nature of its listing. (For a discussion of the documentation required to support an asterisked OCD listing, see question 13, "May an Organization with an Independent IRS Exemption Letter Ever Be Included in the OCD?" in the second part of this section.)

Applications not eliminated in this initial screening should be reviewed to determine whether the applicant organization meets the three major criteria for inclusion in the Group Ruling: (A) it must be described in section 501(c)(3) of the Code; (B) it must be a public charity, rather than a private foundation, within the meaning of section 509(a) of the Code; and (C) it must be an agency, instrumentality, or an educational, charitable, or religious institution that is operated, supervised, or controlled by or in connection with the Roman Catholic Church in the United States, its territories, or possessions. These criteria are explained more fully below.

A. Section 501(c)(3)
Section 501(c)(3) of the Code describes the following organizations:

Corporations, and any . . . fund, or foundation organized and operated exclusively for religious, charitable, scientific, . . . literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
In order to qualify as an organization described in section 501(c)(3), the applicant organization must be both organized and operated exclusively for exempt purposes. These requirements are known as the "organizational test" and the "operational test," respectively. If an organization fails to meet either test, it is not described in section 501(c)(3) and may not be included in the Group Ruling.

1. Organizational Test
In order to meet the requirements of the "organizational test," the applicant organization must constitute a legal entity under the laws of a state or U.S. territory or possession. A mere group of individuals coming together to perform charitable works does not constitute a legal entity eligible for inclusion in the Group Ruling. For example, several members of a women's religious order (typically a foreign religious order) come to a diocese in order to perform ministerial work and request inclusion in the Group Ruling. These women religious are not entitled to be included in the Group Ruling because they do not meet the threshold organizational requirement.

The organization must also have an organizing document that meets specific requirements set forth in IRS regulations. The term "organizing document" refers to the organization's articles of incorporation, trust instrument, constitution, corporate charter, articles of association, or other written document by which it is created. Bylaws do not qualify as an organizing document.

The reviewing official must examine the organizing document to ensure that its purposes are limited exclusively to one or more purposes enumerated in section 501(c)(3) ("exempt purposes"). For example, an organization's articles might state that it is organized "to operate a nursing home." This purpose is too broad because nursing homes can be operated in a non-charitable manner. This defect could be remedied by amending the purposes to read "to operate a nursing home in a charitable manner within the meaning of section 501(c)(3) of the Code." Many concerns about whether an organization's purposes satisfy the organizational test may be avoided by adding the following or similar language to the organization's purpose clause:

Any other provisions herein notwithstanding, the organization will at all times be organized and operated exclusively for exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of 1986 or a corresponding section of any future federal tax code.
The reviewing official must also ensure that the organization's organizing document contains a clause that dedicates its assets upon dissolution permanently to exempt purposes. The following or similar language will satisfy IRS requirements:

Upon dissolution or termination of the organization, its assets will be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code of 1986 or a corresponding section of any future federal tax code.
In the alternative, an organization may identify a particular section 501(c)(3) church organization to which assets will be distributed upon dissolution. The IRS has indicated that the non-profit corporation statutes of the following states satisfy the dissolution clause requirement: Arkansas, California, Louisiana, Massachusetts, Minnesota, Missouri, Ohio, and Oklahoma. Non-profit corporations in these states are not required to include an IRS-approved dissolution clause in their articles of incorporation. However, the IRS has indicated that no jurisdiction provides such certainty by statute or case law with respect to the dissolution of an unincorporated non-profit association. Accordingly, the organizing document of any unincorporated non-profit association must contain an appropriate dissolution clause.

Any organization that does not meet the requirements of either the purposes or dissolution component of the organizational test cannot be included in the Group Ruling. Its application should be returned with an appropriate explanation.

2. Operational Test
In order to meet the requirements of the "operational test," the applicant organization must be operated exclusively for exempt purposes, which are those enumerated in section 501(c)(3): i.e., charitable, educational, religious, scientific, literary, etc. The term "charitable" includes relief of the poor, distressed, or underprivileged; promotion of health; advancement of religion, education, or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of government; promotion of social welfare; lessening of neighborhood tension; elimination of prejudice and discrimination; defense of human and civil rights secured by law; and combating of community deterioration and juvenile delinquency. Concepts of what constitutes "charity" evolve over time and are reflected in IRS rulings and in case law.

For purposes of the operational test, the IRS interprets "exclusively" in terms of substantiality. Thus, an organization will not satisfy the operational test if more than an insubstantial part of its activities is not in furtherance of exempt purposes. An applicant organization must describe its actual or proposed operations with completeness and specificity. The reviewing official should not hesitate to reject the application of any organization that cannot (in the case of a newly created organization) or will not describe its activities or proposed activities with sufficient specificity to permit a determination of whether the organization will be operating for section 501(c)(3) purposes.

Inurement/Private Benefit
In order to meet the requirements of the operational test, the applicant organization also must be operated for public purposes rather than private interests. Further, the organization's net earnings may not inure to the benefit of private shareholders or individuals, more commonly understood as "insiders." Simply stated, an organization's insiders—such as trustees, officers, members, founders, or even employees with sufficient influence over the organization—may not benefit financially except in the form of reasonable compensation. Any inurement to the benefit of insiders is sufficient to jeopardize exempt status under section 501(c)(3).4

In addition, an organization may not operate for the benefit of private interests, other than to an insubstantial extent. This requirement is separate from the inurement prohibition and does not require the presence of an "insider." Private benefit conferred on any individual or organization, other than that which is incidental (both qualitatively and quantitatively) to the accomplishment of an exempt purpose, will jeopardize exempt status.

Applicant organizations that raise either inurement or private benefit concerns should not be approved for inclusion in the Group Ruling.

Lobbying Activities
In order to meet the requirements of the operational test, the applicant organization must not engage in more than insubstantial lobbying activities, as measured against its total activities. This limitation applies to attempts to influence legislation both directly and through grassroots lobbying. There is no distinction between lobbying activity that is related to the organization's exempt purposes and lobbying that is not. For most church organizations, there is no definitive answer regarding what constitutes "more than insubstantial" lobbying. One court case held that less than 5% of an organization's time and efforts devoted to lobbying was not substantial, whereas another held that 17% of an organization's budget devoted to lobbying was substantial. It would be fair to say that the IRS is more comfortable at the lower end of the spectrum. If the reviewing official suspects that an organization is or will be engaged in more than insubstantial lobbying, its application should be referred to the diocesan attorney or should be rejected and returned with a brief explanation, as appropriate.

Political Activities
In order to meet the requirements of the operational test, an organization must not participate in or intervene in a political campaign on behalf of or in opposition to a candidate for elective public office. This is an absolute prohibition. More detailed information on what constitutes intervention in a political campaign, beyond obvious activities such as endorsing or opposing candidates and providing financial support to candidates, may be obtained from the USCCB Office of General Counsel memorandum on political campaign activity, which is issued in presidential election years and is available at www.usccb.org/ogc. If the reviewing official believes or suspects that an applicant organization has participated or will participate in prohibited political campaign activity, its application should be referred to the diocesan attorney or should be rejected and returned with a brief explanation, as appropriate.

It is recommended that the following language be included in an applicant organization's organizing document in order to demonstrate adherence to the above operational requirements:

No part of the net earnings of the organization shall inure to the benefit of, or be distributable to, its members, trustees, officers, or other private persons, except that the organization shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth herein. No substantial part of the activities of the organization shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the organization shall not participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of or in opposition to any candidate for public office.
3. Special Issues
In addition to the general requirements outlined above, certain organizations present special issues of which reviewing officials should be aware.

Schools and Racial Discrimination
Section 501(c)(3) has been interpreted and applied so as to require private schools, including church-related schools, to avoid racial discrimination in both policy and practice. All schools included in the Group Ruling must comply with the requirements of Rev. Proc. 75-50, 1975-2 C.B. 587, concerning the application and publication of their racially nondiscriminatory policies. Annually each school must publish its racially nondiscriminatory policy and must file certification of racial nondiscrimination (Form 5578) with IRS. This may be done on a diocese-wide basis for all schools operated by the diocese. Non-diocesan schools are responsible for complying with Rev. Proc. 75-50 on an individual basis. The application of any school that fails to adopt a racially nondiscriminatory policy or that otherwise fails to meet the requirements of Rev. Proc. 75-50 should be rejected and returned with an appropriate explanation.

Housing Organizations
Organizations created for the development or creation of housing, whether for elderly, handicapped, or low-income individuals, require particular scrutiny by reviewing officials.

The IRS recognizes that the elderly as a class are highly susceptible to certain forms of distress. As a result, organizations providing elderly housing may qualify as charitable if they operate in a manner designed to satisfy three IRS-identified needs of the elderly: housing, health care, and financial security. Both rental units and more traditional homes for the elderly may qualify.

Applications from organizations that provide housing only for upper income individuals; that do not include facilities designed to meet the physical, recreational, social, health care, etc., needs of the elderly; or that fail to adopt policies of maintaining in residence those who become unable to pay, or of providing services at the lowest feasible cost, should be referred to the diocesan attorney or should be rejected and returned with a brief explanation, as appropriate.

The IRS applies a similar analysis to the needs of the physically handicapped (Rev. Rul. 79-19, 1979-1 C.B. 195). To qualify under section 501(c)(3), an organization should provide specially designed housing that is within the financial reach of a significant segment of the community's handicapped persons. In addition, it should be committed to operating at the lowest feasible cost (consistent with maintaining its services) and to maintaining in residence those tenants who become unable to pay. Suspect applications should be referred to the diocesan attorney or should be rejected and returned with a brief explanation, as appropriate.

The provision of low-income housing can be a charitable activity, as a form of relief to the poor or distressed. However, the IRS has indicated that providing housing to moderate-income individuals is not a charitable activity (see Rev. Rul. 70-585, 1970-2 C.B. 115, Situation 4). It is not necessary that low-income housing include solely low-income individuals in order to qualify as charitable, since inclusion of some moderate-income individuals is useful for purposes of stability. The IRS has published safe-harbor guidelines for determining what percentage of units must be occupied by low-income individuals in order for housing to be considered fulfilling a charitable function (see Rev. Proc. 96-32, 1996-1 C.B. 717). Generally, the following requirements must be met:

  1. At least 75% of the units must be occupied by low-income residents and either (1) at least 20% of the units must be occupied by very-low-income residents or (2) 40% must be occupied by residents that do not exceed 120% of the very-low-income limit for the area in which the housing is located (up to 25% of the units may be provided at market rates to residents who have incomes in excess of the low-income limit).

  2. The project must actually be occupied by poor and distressed residents, subject to a reasonable transition period (typically one year) to place the project into service.

  3. The housing must be affordable to the charitable beneficiaries.

  4. If the project consists of multiple buildings and each building does not separately meet the safe harbor requirements, the buildings must share the same grounds.
Applicant low-income housing organizations that fail to meet the IRS safe harbor should not be included in the Group Ruling. Although such organizations may be considered charitable based on an analysis of all the relevant facts and circumstances, the IRS, not diocesan officials, should make this determination.

Caution: Organizations engaged in housing development—whether elderly, low-income, or handicapped—frequently propose to engage in joint ventures, partnerships, or limited liability companies with individual investors, developers, or for-profit organizations. This is an independent basis for declining to include an organization in the Group Ruling, since these are general grounds for ineligibility (see question 2, "Who Is Ineligible?" in the first part of this section).

Day Care Centers
The term "educational purposes" within the meaning of section 501(c)(3) includes the provision of care for children away from their homes if (1) substantially all (interpreted as at least 85%) of the care provided is for the purpose of enabling individuals (i.e., parents) to be gainfully employed; and (2) the services are available to the general public. (See IRC § 501[k].) The IRS guidance indicates that the first criterion means that parents of children being cared for must be unable to work unless they find another means of caring for their children during their time at work. The IRS has also indicated that the "general public" requirement will be satisfied even if enrollment is limited to children within a geographic area, or if admission is restricted to children of certain ages. However, enrollment may not be limited to or provide preferences for children of the employees of a specific employer or employers. In addition, a day care center can qualify for exemption under section 501(c)(3) as a charitable organization if it is operated for the benefit of low income or otherwise disadvantaged children, on the grounds of relief of the poor or distressed.

Provision of Ordinary Commercial Services
Provision of commercially available services—e.g., legal, accounting, insurance, purchasing, management, payroll, computer programming, Internet, data processing, and financial administration—is not charitable per se. Therefore, applications from organizations that propose to provide any such services must be scrutinized carefully. Generally, such organizations will not qualify as charitable unless services are provided at substantially below cost or are limited to structurally related organizations. "Structural relationship" includes provision of services to a parent organization, or to one or more subsidiaries of a common parent organization. For example, an organization formed by a diocese to provide accounting services to the diocese and its subsidiary organizations (e.g., parishes, schools, Catholic Charities) would be considered structurally related. However, an organization formed to provide insurance services to all Catholic organizations listed in the OCD under a particular diocese generally would not be acceptable, because OCD listing does not establish the required structural relationship.

Therefore, any organization that is created to provide ordinary commercial services for a fee, and that cannot establish the existence of the required structural relationship between itself and the organizations to which services are provided, should be referred to the diocesan attorney or should be rejected and returned with a brief explanation, as appropriate.

Conduit Organizations
Organizations that serve as conduits for funds that are earmarked or inevitably destined for foreign organizations may not be included in the Group Ruling, because contributions to such organizations are not deductible as charitable contributions under section 170 of the Code. It is possible, by adhering to stringent IRS guidelines regarding full discretion, control, and accountability, to establish a domestic "friends of" organization to which contributions are deductible (see Rev. Rul. 63-252, 1963-2 C.B. 101; Rev. Rul. 66-79, 1966-1 C.B. 48; and Rev. Rul. 75-65, 1975-1 C.B. 79). However, this is a very complex and nuanced area of the law. Therefore, reviewing officials should not approve an organization for inclusion in the Group Ruling if there is any doubt about deductibility of contributions due to conduit/earmarking issues. This is particularly true if the organization claims to be a section 509(a)(3) supporting organization with respect to the foreign organization(s). The IRS considers there to be an inherent conflict between avoiding the conduit/earmarking prohibitions while at the same time satisfying the relationship requirements of section 509(a)(3).

B. Public Charity Status—Section 509(a)
All organizations described in section 501(c)(3) of the Code can be divided into two sub-categories: private foundations and public charities. No organization that is a private foundation may be included in the Group Ruling. Therefore, the reviewing official must ensure that any applicant organization qualifies as a public charity. There are several methods whereby an organization can do so. Certain types of organizations are by definition considered to be public charities: churches, conventions of churches, educational organizations (schools), and hospitals. An organization can also qualify under one of two support tests under sections 509(a)(1) or 509(a)(2) or as a supporting organization under section 509(a)(3).

1. Section 509(a)(1)
The reviewing official should first determine whether the applicant organization qualifies under one of the definitional categories as a church, school, or hospital.

Churches and Conventions of Churches
Not every religious organization is a church. Neither the Code nor the regulations defines the term "church." However, the IRS generally applies fourteen criteria in determining an organization's status as a church.5 All facts and circumstances should be taken into account in determining whether an organization qualifies as a church. Although an organization need not satisfy all fourteen criteria, satisfying only one or two is insufficient. Obvious examples of organizations that qualify as a "church" are dioceses, parishes, and mission churches. In addition, religious institutes typically claim this status. Church status in the Catholic context generally will be limited to these categories. Other types of organization that claim status as a "church" should be asked to select another basis for public charity status. The term "convention or association of churches" generally refers to the central convention of a group of churches or to an association of churches of different denominations. (See IRC § 170[b][1][A][i].)

Educational Organizations/Schools
An "educational organization" is defined as an organization whose primary function is the presentation of formal instruction and that "normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on." Included in this category are elementary schools, secondary schools, preparatory or high schools, colleges, and universities. This definitional classification does not include organizations that are engaged in both educational and noneducational activities, unless the noneducational activities are "merely incidental" to the educational activities. For example, an organization that primarily engages in medical research but also offers instruction to doctors on a limited basis would not be considered an educational organization. The existence of a regularly enrolled student body and a regular faculty are essential criteria. An organization may be "educational" yet not qualify as an educational organization in the "school" sense required here. (See IRC § 170[b][1][A][ii].)

Hospitals and Medical Research Organizations
To be classified as a "hospital," an organization's principal function must be the provision of medical care. The term "medical care" is defined as the treatment of any physical or mental disability or condition, whether on an inpatient or outpatient basis. A rehabilitation institute, mental health facility, drug treatment center, or extended care facility may qualify as a hospital if its principal function is the provision of medical care. The term "hospital" does not include homes for children, the aged, or convalescents; vocational training facilities for the handicapped; or organizations providing health care services to patients in their own homes.

To qualify as a "medical research organization," an organization's principal function must be the continuous active conduct of medical research in conjunction with a hospital. Such an organization must either devote a substantial part of its assets to medical research or expend a significant percentage of its endowments for that purpose. An organization that merely disburses funds to other organizations in support of their research, or makes grants or scholarships to individuals, is not a medical research organization.

2. Publicly Supported Organizations
An organization that is not a church, school, or hospital may establish public charity status by meeting one of two support tests described below. Organizations must submit actual or budgeted financial data covering a four-year period if they claim public charity status under one of these support tests.

First Support Test: Sections 509(a)(1) and 170(b)(1)(A)(vi)
The first support test applies generally to organizations that receive their funds from government sources or contributions from the general public. Organizations in this category normally must receive at least one third of their total support from governmental units, direct or indirect contributions from the general public, or a combination of these sources. "Support" does not include amounts derived from capital gains, the performance of exempt functions, or contributed services. The term "normally" generally refers to the four tax years immediately preceding the year involved, on an aggregate basis.

To determine whether an organization is publicly supported under this section, one must compute its public support fraction. The denominator of the public support fraction includes the organization's total support from any combination of gifts, grants, contributions from the general public or governmental units, membership fees, unrelated business income, and investment income. To the extent that a single donor's contribution exceeds 2% of the organization's total support, it must be excluded from the numerator of the public support fraction, although the entire amount of such contribution is included in the denominator of the fraction. The 2% limitation does not apply to contributions from other section 170(b)(1)(A)(vi) organizations, governmental units, and other organizations that normally receive a substantial part of their support from public contributions, such as churches.

Example: An organization received income from the following sources during taxable years 1995 through 1998:

  1. $120,000—Interest and dividends
  2. $80,000—Net income from unrelated business
  3. $10,000—Capital gains
  4. $10,000—Admissions fees (from the exercise of exempt functions)
  5. $400,000—Gifts and contributions from the general public
The organization's public support fraction would be $400,000/$600,000, or 66-2/3% public support. Its total support is $600,000, the sum of items (a), (b), and (e). Items (c) and (d) are excluded because capital gains and income from exempt purposes are not included in the definition of support for purposes of section 170(b)(1)(A)(vi). The numerator of the public support fraction is $400,000, because only item (e) qualifies as public support.

Second Support Test: Section 509(a)(2)
The second support test applies to organizations that support themselves by means of membership dues or fees received for their exempt activities (e.g., a deacon's association, nursing home, or a retreat center). To qualify, the organization normally must receive more than one third of its support from any combination of (1) gifts, grants, contributions or membership fees, and (2) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities in the performance of exempt activities. In addition, it normally may receive not more than one third of its support from gross investment income and taxable unrelated business income in excess of taxes imposed by section 511. "Normally" refers to the same four-year period described above.

The denominator of the organization's support fraction is its total support (excluding capital gains) for the year. Support from disqualified persons6 may not be included in the numerator of the support fraction. In addition, gross receipts from exempt activities may be included in the numerator only to the extent that the amount received from a single source, other than organizations described in section 509(a)(1), does not exceed the greater of $5,000 or 1% of the organization's total support in the taxable year. If an organization is described both in sections 509(a)(1) and 509(a)(2), it will be classified under section 509(a)(1).

Example: For taxable years 1995 through 1998, an organization received support of $400,000 from the following sources:

Gov. Agency A (gross receipts for exempt services) $20,000
Gov. Agency B (gross receipts for exempt services) 20,000
General Public (gross receipts for exempt services) 100,000
General Public (contributions) 60,000
Gross Investment Income 100,000
Contributions from Substantial Contributors 100,000

$400,000

The $20,000 received from each agency exceeds 1% of total support (1% x $400,000 = $4,000). Therefore, only $5,000 is includible in the numerator of the support fraction. Thus, the organization received support includible in the numerator of the section 509(a)(2) support fraction as follows:

Agency A $ 5,000
Agency B 5,000
General Public (gross receipts) 100,000
General Public (contributions) 60,000

$170,000

The support fraction is $170,000/$400,000, more than the required one-third minimum. In addition, the gross investment income fraction is $100,000/$400,000, within the permissible range.

3. Section 509(a)(3) Supporting Organization
An organization that does not meet any of the above tests may still qualify as a public charity if it qualifies as a supporting organization. The requirements for supporting organization status are lengthy and complicated. Only a brief explanation is provided here. Unlike the provisions of sections 509(a)(1) and (2) discussed above, supporting organizations qualify for public charity status on the basis of their relationships to other organizations, which are themselves classified as public charities under sections 509(a)(1) or 509(a)(2). Supporting organizations are considered to be public charities on the theory that they are indirectly responsive to the public by reason of these relationships. Typical supporting organizations include diocesan endowment trusts and hospital or university fundraising subsidiaries. Applicant organizations may not meet the requirements of section 509(a)(3) by claiming to support the Roman Catholic Church generally.

To qualify as a section 509(a)(3) supporting organization, an organization must meet all of the following criteria:

  1. Organized and at all times operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified church organizations that are classified as public charities under sections 509(a)(1) or 509(a)(2)

  2. Operated, supervised, or controlled by or in connection with one or more of these church organizations classified as public charities under sections 509(a)(1) or 509(a)(2)

  3. Not controlled directly or indirectly by one or more disqualified persons, other than foundation managers or one or more supported church organizations
To satisfy the first criterion, the supporting organization should (a) include a provision reciting the required relationships in its organizing document, and (b) specifically identify its supported church organization(s).7 For purposes of the third criterion, an organization will be considered controlled directly or indirectly by disqualified persons if such persons possess 50% or more of the voting power in the organization's governing body, or if one or more disqualified person has veto power over the actions of the organization. The relationships required by the second criterion are summarized below:

2a. "Operated, supervised or controlled by"—This relationship is comparable to a parent-subsidiary relationship, which is established through the election or appointment of a majority of the supporting organization's officers, directors, or trustees by the governing body, members of the governing body, officers, or membership of one or more of the supported church organizations that qualify as public charities under sections 509(a)(1) or 509(a)(2).

2b. "Supervised or controlled in connection with"—This relationship requires common supervision or control of the supporting and supported organizations. It is established if the control or management of the supporting organization is vested in the same individuals that control or manage the supported church organization(s) that qualify as public charities under sections 509(a)(1) or 509(a)(2).

Caution: Reviewing officials should be aware that self-perpetuating boards generally will not meet the requirements of either of the first two tests (2a or 2b). The problem is that although the initial board may establish the appropriate relationship between the supporting and supported organizations, there is no guarantee that subsequent board composition will maintain the requisite relationship. Accordingly, organizations with self-perpetuating boards should not be approved as section 509(a)(3) organizations.

2c. "Operated in connection with"—This is the most complex of the three relationships identified in section 509(a)(3) and will frequently require a supplemental legal opinion by the attorney for the applicant organization. To qualify, an organization must meet both the "responsiveness test" and the "integral part test" under the IRS regulations.

  1. Responsiveness Test—Generally, the supported church organization(s) must have a "significant voice" in the supporting organization's policies. The "significant voice" must apply to all aspects of the supporting organization's policies and activities, including investment policies, timing and manner of making grants, selection of recipients, and direction of the use of income or assets. This may be accomplished in one of three ways. First, one or more of the officers, directors, or trustees of the supporting organization must be elected or appointed by the supported church organization. Second, one or more members of the governing body of the supported organization must serve as an officer, director, or trustee of the supporting church organization. Third, the officers, directors, or trustees of the supporting organization must maintain a close and continuing relationship with their counterparts in the supported church organization. Organizations that are charitable trusts under state law are excepted from the "significant voice" requirement. If the supported organization has the power to enforce the trust and to compel an accounting, the supporting organization will meet the responsiveness test.

  2. Integral Part Test—The underlying objective of this test is to ensure that the supporting organization maintains significant involvement in the operations of the supported church organization and that the supported organization is dependent upon the supporting organization for the type of support it provides. This test may be met in one of two ways. First, the supporting organization must conduct activities that carry out the purposes or perform the functions of the supported organization of the type that would normally be carried on by the supported organization but for the involvement of the supporting organization. This test is not intended for grantmaking organizations. Second, the supporting organization must pay substantially all (at least 85 %) of its income to or for the use of the supported church organization. This support must be sufficient to ensure the supported organization's attentiveness to the operations of the supporting organization. Sufficiency of support is a matter determined on the basis of all relevant facts and circumstances.
Caution: This third test (2c) is exceptionally complex and fact-specific. It is preferred that applicant organizations qualify under one of the first two tests. Several questions on the Group Ruling application address qualification under section 509(a)(3). The reviewing official may also wish to require the applicant organization to submit a supplemental legal opinion in this issue. Typically, applications for supporting organization status will require review by the diocesan attorney.

Questionable applications—i.e., where the organization cannot clearly establish that it is a public charity under section 509(a)(1), 509(a)(2), or 509(a)(3)—should be referred to the diocesan attorney or rejected by the reviewing official and returned with a brief explanation, as appropriate.

C. Relationship with the Church in the United States
The Group Ruling covers the "agencies and instrumentalities and all educational, charitable and religious institutions operated, supervised, or controlled by or in connection with the Roman Catholic Church in the United States, its territories or possessions. . . ." This is the operative language defining the relationship with the Church necessary for inclusion in the Group Ruling. It is within the sole discretion of each diocese or USCCB, as appropriate, to determine whether a particular organization possesses sufficient relationship with the Church to warrant inclusion in the Group Ruling.

In reaching this decision, all facts and circumstances will be considered, including purposes set forth in the organizing document, corporate membership and control, financial support, destination of assets on dissolution, presence of episcopal advisors or moderators, and any other relevant factors.

Certain types of organizations generally lack the appropriate relationship to the Church in the United States to warrant inclusion on the Group Ruling, including (1) organizations whose membership happens to be composed of Catholic individuals, whether lay, religious, or clergy, without any structural relationship to any church entity; (2) ecumenical organizations; (3) organizations in which control is shared 50-50 between Catholic and non-Catholic entities; (4) organizations that have been sold, merged into, or otherwise alienated to non-Catholic entities; and (5) organizations controlled by non-United States (including territories and possessions) church entities. Neither these organizations nor others determined by the diocese to lack sufficient relationship to the Church should be included in the Group Ruling or approved for asterisked OCD listing.

Notes

  1. A conduit organization is one that was formed to accept contributions for which it is not the ultimate recipient, but rather which are destined for or earmarked for transfer to foreign organizations. The conduit organization is only nominally the beneficiary of such contributions; the real beneficiary is the foreign organization, which is not eligible to receive deductible contributions.
  2. The identity of the diocesan official charged with responsibility for reviewing applications for inclusion in the OCD will vary from diocese to diocese. Organizations are advised to call the Chancery to determine to whom applications should be directed.
  3. An organization that does not have an EIN should obtain Form SS-4 from the local IRS office, and file that form as directed in the instructions. However, the organization should not use the USCCB group exemption number (GEN) on its SS-4. Applications without EINs should not be processed.
  4. In addition to the prohibition against inurement, section 4958 of the Code imposes excise taxes on both disqualified persons and organization managers involved in "excess benefit transactions" with disqualified persons. Briefly, these are non-fair market value transactions, including the payment of unreasonable compensation, involving a section 501(c)(3) organization and a "disqualified person," defined for purposes of section 4958 as any person in a position to exercise substantial influence over the affairs of the organization, as well as certain family members. The legislative history of section 4958 indicates that the IRS may still revoke the tax-exempt status of an exempt organization for violating the inurement prohibition, whether or not it imposes section 4958 excise taxes. However, the intent is that section 4958 excise taxes will be the sole sanction in those cases in which the excess benefit (inurement) does not rise to the level where it calls into question the exempt nature and functioning of the organization. (See additional discussion in the first section of this chapter, "Income Tax Issues.")
  5. The fourteen criteria used by the IRS to evaluate whether an organization is a "church" are as follows: (1) distinct legal existence; (2) recognized creed and form of worship; (3) definite and distinct ecclesiastical government; (4) formal code of doctrine and discipline; (5) distinct religious history; (6) membership not associated with any other church or denomination; (7) ordained ministers ministering to a congregation; (8) ordained ministers selected after completing prescribed studies; (9) literature of its own; (10) established places of worship; (11) regular congregations; (12) regular religious services; (13) Sunday schools for youth religious instruction; and (14) schools for the preparation of ministers.
  6. Disqualified persons for this purpose are defined in section 4948(a)(1) of the Code to include the following: substantial contributors; foundation managers; 20%-owners of organizations that are substantial contributors; government officials; and certain family members, corporations, partnerships, trusts, estates, and private foundations.
  7. Although it is possible, under certain circumstances, to identify publicly supported organizations by class, applicant organizations will increase the likelihood that their applications will be approved if they identify the supported church organizations with specificity.


Attachment A

Application for Inclusion in USCCB Group Ruling


Attachment B

Sample Letter for Approved Group Ruling Applicants